Financial Times
May 7, 2012
It is easy to solve the eurozone crisis on a piece of paper. I have done it many times. It is also easy to invent new institutions: a fiscal union, a treasury secretary, a common sovereign bond and a banking union. I would welcome most of these. But we must subject these discussions to a reality check. While these institutions will emerge from this crisis, none of them can solve it. That will have to be the job of the existing institutions.
This applies particularly to the idea of a common bank resolution fund. It is a great idea, but political resistance to it will be so big that it will not be implemented in full and in time. It will not solve the crisis.
The solution can come only from a combination of two instruments – debt monetisation through the European Central Bank and default into the European Stability Mechanism, the €500bn rescue fund that becomes operational in July.
In practice, any resolution of the crisis will involve more of the latter than the former. We have reached the limits of what the ECB will do. I agree with Paul de Grauwe, of the London School of Economics, that direct purchases of government bonds would have been more effective than the indirect route of long-term refinancing operations. But the ECB is unlikely to go that far.
Instead, the most obvious solution will come through a default by a troubled eurozone country into the ESM and the other rescue funds.
I can see a scenario in which Greece remains in the eurozone. But I cannot see one in which Greece can honour its future debt liabilities. Greece’s economy is already slipping behind the forecasts of the latest bailout programme. There is a big ESM wall at the end of the road.
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